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INTEGRATION INTO THE GLOBAL VALUE CHAINS. REMENDATIONS FOR UKRAINE
Guzhva Igor,
Ph.D. in International Economy,
Vice-Rector for Research and International Relations;
Ukrainian State University of Finance and International Trade
ARTICLE INFO
ABSTRACT
Received 16 November 2015 Accepted 28 November 2015 Published 30 December 2015
KEYWORDS
international division of labor,
global value chain, transaction cost, trade facilitation, strategy.
© 2015 The Author.
The article deals with the global value chains (GVCs) formation and functioning peculiarities, as well as defines the necessary conditions to include national commodity producer in its composition. It proposes to elaborate a strategic action plan regarding the GVC development with the involvement of national commodity producers. This plan should include the following as the key areas: optimizing trade and investment barriers; developing services and infrastructure as the main aspect of GVCs; promoting government assistance within the quality country's economy participation in GVCs to implement innovative technologies; fostering the inclusion of small and medium-sized enterprises in GVCs; taking effective measures to provide trade facilitation under the WTO Agreements; encouraging public-private partnerships in the context of GVCs and developing international cooperation between all international and national business stakeholders with regard to GVCs.
Introduction. To use globalization for its own development, Ukraine needs to create a new foreign economic policy which would fall squarely within the context of the relevant policies concerning leading countries as well as the countries that are growing rapidly. It must be realized that the real extent of the modern economy and, accordingly, foreign economic activity is determined not so much by the size of exports and imports but rather by the value added generated in a given country, its influence within the global value chains (GVCs). This requires a rethinking of the country's foreign economic and industrial policy objectives and mechanisms. Therefore it is important for Ukraine to join these chains as soon as possible by creating the necessary prerequisites for it.
The purpose of the article is to reveal the global value chains formation and functioning features and to identify the necessary prerequisites for effective inclusion of the branches of the Ukrainian national economy at its current stage in these chains.
Analysis of recent research and publications. World expert and business environment takes considerable interest in the problems associated with GVCs, as evidenced by the regular analytical studies of the OECD, the World Bank and the WTO [1]. The idea of GVCs, as a research method, was first developed by Mc Kinsey & Company, with its methodological framework established by Porter [2]. Afterwards, GVCs began to develop rapidly, not only as a model of research, but also as a practical and effective strategy for transnational corporations (TNCs) (P. Draper, G. Gereffi, R. Baldwin, G. Grossman and others). With regard to domestic research, it should be noted, studies including: Olena Borodina on agricultural producers integration to global agro-food value chains [3]; E. Krykavsky and N. Chornopyskoy's research dedicated to the problems associated with Ukraine's participation in global supply chains [4] and A. Ignatyuk's exploration of the role of GVCs in Ukraine's economic competitiveness [5]. However, despite the issue of engaging domestic producers in GVCs to be of extreme relevance, the lack of insufficiency of theoretical and practical research should be taken into account, as an indication of the need for further investigation.
Presentation of main material. The current organizational structure of international business was formed under the influence of the international transformation of the division of labor, where a prominent place is given to constituent part specialization. This has developed a new form of
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international cooperation - global value chains that have a major impact on the globalization processes, as it allows to include new markets, countries and national corporate structures in global reproductive processes, encouraging diffusion of innovations and scientific and technological progress, creation of new jobs, social technologies and practices. The share of goods and services produced exclusively within one country or one firm is declining rapidly. Technological and managerial innovations and the liberalization of cross-border movement of resources, goods, services and capital led to the emergence of global value chains.
Global value chains have emerged as a strategy that organizes geographically dispersed production complexes into a single integrated compound on the basis of their specialization and complementarity of the production of certain final products or services. As a result, according to R. Zuykov, "transnational reproductive structure has been formed in light of transnational industrial and investment cooperation relations in the framework of the world economic system relations. It is formed by means of the internal and inter-corporate production relations maintaining within TNCs networks and their affiliates"[6, p. 57]. Global trade increasingly involves exports of parts, components, subassemblies, and services within the framework of global value chains and associated production networks.
This has led to increasing of task-related specialization by companies in the production of final goods and services and acceleration of international intra-sectoral trade growth and a sharp rising of international movement of goods between different structures of TNCs as a result of the active development of the international division of labor, it is also called the international division of the production process [7]. Accordingly, this process led to the rapid development of international production and supply chains.
The transformation of the geographic organization structure of the international business through the GVCs creates opportunities for new entrants in the international economy. As production systems become decentralized, fragmented, and more specialized, new market opportunities emerge for all types of companies, including small- and medium scale enterprises (SMEs) to enter global markets, and upgrade into higher value export activities through specialization. Many firms, particularly smaller enterprises conclude that it is possible to success in "creating value" that may be achieved through specialization in a limited and sometimes in a very narrow range of market (market niches). However, the use of these advantages and opportunities requires that enterprises are able to supply specified products in the right quantity, right quality and price and at the right time. It must be borne in mind that its entry requirements can be high, as well as the payoffs from participation in GVCs.
GVCs provide significant opportunities for countries to expand exports. They enable firms to focus on specific components or activities in which they have competitive advantages, for instance, on low-cost or high quality power. They can also develop and implement effective strategies for raw materials processing, where they are already competitive. GVCs allow even small enterprises to become internationally competitive, based on a one single function or a small number of functions as suppliers in global value chains. It is possible through participation in global value chains to achieve large-scale exports of specialized outputs in niche markets that are regional or even global in scale.
Within the framework of GVC higher-level buyers can provide access to know how in technology, management, marketing, to intermediate resources and to credits. However, to compete in the world of international business, enterprises of these countries, including Ukraine, should change the concept of its development and to base it primarily on efficiency of the whole GVC, that is to say the main goal - is to achieve systemic efficiency, which entailed meeting of a number of the fundamental requirements.
First, according to the traditional concept of exports, an enterprise produces a product for the domestic market and then finds foreign buyers. Consistent with this, the firm itself decides the best manner of increasing export efficiency. But supplying international markets is more and more involving of certain products or services making according to the global buyer requirements. This encourages the enterprise to specialize, but requires coordination of its actions with the firms involved in the GVCs. Therefore, the main requirement to corporate strategy for a specific value chains participant - is to operate in the context of systemic efficiency.
Second, the effectiveness is determined not only by what happens within a firm, but also by activities and relationships outside the firm that are characterized by the features of the specific GVCs. Moreover it should be borne in mind, that inter-companies logistics and import/export procedures
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identify critical delivery times. Therefore competitive effectiveness of the company within the GVCs -is a function of relations between enterprises within a specific GVCs. Analysis of the GVC effectiveness and specific participant means examining enterprises in a given chain and relationships between them in order to know how and when they can be strengthened to achieve production and marketing efficiencies; or to promote a more efficient vertical and horizontal flow of information, production factors and resources. Emphasis is making also on general factors that influence the effectiveness of specific value chains: legislative, regulatory and policy environment; availability and quality of support services such as financing, training and information technology.
Third, the most important within the GVCs is the specialization of a participant. Value creation is associated not only with the final products and brands: there are opportunities for value creation across the whole chain due to specialization and modernization. The enterprise level modernization requires access to information, technology and finance and it is closely linked with incentives that encourage or discourage it by other GVC participants.
"Match the best or outsource to the best" - is the basic principle of the effective functioning of GVCs. To be competitive, the enterprises effectiveness must be constantly matched in relevance with the "best in its class" that concerns each activity, function or product, such as manufacturing, design, logistics or marketing. If they are unable to "match the best", they most likely will not be able to compete effectively on international markets as suppliers in the GVCs.
Fourth, it is necessary to cooperate in order to be effective. SMEs may face significant difficulties in working together within the GVCs. However, vertical and horizontal cooperation within the framework of GVCs can provide an effective mechanism for achieving collective efficiency through joint actions and support each enterprise. Vertical linkages - are the relations between the firms at different levels in the value chain, particularly among inputs and components suppliers, assemblers and distributors on final markets. Linkages between vertically related companies can improve enterprise access to new markets, skills, technology, information and knowledge. Horizontal linkages between companies on the same level in the GVCs can allow to conduct volume procurement of the key production resources, including equipment, raw materials, finance and business services. It can also expand joint production capacities to fulfill large orders on a regular basis through economies of scales, facilitate specialization in production and strengthening market position.
Fifth, domestic producers should be considered as potential TNC members of global chains. This includes both possibilities at the company level and system support providing by government, for instance: terminals, logistics, customs and so on. Trade and supply within the GVCs stimulates the development of logistics as a crucial component of global chains, since the products supply in the right quantity as well as the right quality, and in particular time frame is considered to be an extremely important problem. GVC participants require not only lower transport costs, but also to meet the increasingly complex logistics needs such as: short transit times, reliable delivery schedules, compliance with rules of handling goods, certification of product quality, and security from theft and so on. Trade regimes and procedures of a country must facilitate intra-product flows in specific value chains. It will be difficult for local companies to become suppliers in the GVCs in case of existing cumbersome import/export procedures (rules, regulations, high import clearance charges). Developing countries face the challenge of cooperation within the GVC - is to move toward a more integrated approach to transport, trade, and transit within the framework of open trade policy regimes. Today the main participants in the global value creation process are North American, Central and Eastern European and South-East Asian countries. Other countries practically do not participate into it. According to GVC development, Ukraine as a country that possesses the sufficient industrial potential takes a low 79th place in the world ranking in 2014, Poland - 53, China - 21, Russia - 96, Azerbaijan - 75, Kazakhstan - 109, Turkey - 54 [8].
It is well known that global trade is under control by TNCs, which account for more than 80% of the world value added, generated within the GVCs. They can accelerate technological progress in one country and suspend it in another; the order volume made by the corporations in a given country determines the speed of economic growth, the foreign trade volumes and its place in the global division of labor. Therefore it is not a country itself such as Ukraine, determines its place in the GVCs but TNCs do it. It is up to TNCs to decide whether it is convenient to work in a particular country or not.
The main factor for joining the GVCs - is the level of transaction costs. The transaction costs level of country's foreign trade reflects its rating in global trade promotion index and its components,
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calculated annually by the World Economic Forum (WEF). In 2014 Ukraine was placed 83th among 138 countries in trade promotion index; in sub-indexes: access to the national market - 22; access to foreign markets - 61; custom procedures quality and effectiveness - 100; availability and quality of transport infrastructure - 55; availability and quality of transport services - 61; availability and use of information technology in trading procedures - 70; operating quality environment (protection of intellectual property rights, access to financial resources, openness to foreign participants, etc.) - 103 [9]. As can be seen, in the country virtually no efforts is currently made on trade facilitation under the WTO Agreement which are necessary conditions to reduce costs and attract customers on GVC and outsourcing services, etc.
The second important point is to make foreign trade and industrial policy of the country clear and predictable for TNCs. Unfortunately, Ukraine so far remains for international corporations as a country of uncertain institutions and future. Therefore, as a consequence, in 2013 Ukraine was placed 117 among 191 countries in the global index of investment country attractiveness; by comparison, Lithuania - 29, Poland - 33, Slovakia - 34, Hungary - 37 [10].
Basically Ukraine has participated, as well as participate partly now, in the GVCs with Russia (defence industry complex, rocket and space and aviation sectors and some enterprises of machinebuilding complex). However, significant political obstacles have been risen for collaboration with Russia, therefore, there is a need to look for new ways in other areas and with other countries.
Conclusions and suggestions. The global value chains (GVCs) have become an important component of the global economy. Taking into account different needs and economy condition, Ukraine should have a comprehensive targeted GVC strategy involving domestic producers. This strategy is crucial to meet challenges in deepen regional economic integration within the European Union and other countries through bilateral and multilateral trade and economic agreements. A strategic plan of action concerning the GVC development, involving Ukraine should include the following:
1. Active work on trade and investment issues that may adversely affect the development of GVCs. Reducing trade and investment barriers will facilitate international firms access to the Ukrainian market and allow them together with the national producers actively looking for opportunities for their inclusion in the GVCs.
2. Ukraine should reach an understanding of the key role of services and infrastructure in the development of GVCs. It is necessary to intensify work to create an open, efficient and internationally competitive sector services and maximize the services contribution to ensure sustainable and reliable supply chains in the context of the Free trade area "Ukraine - European Union". The economic capacity promoting should be targeted to realize and encourage the development of innovative services in the framework of GVCs.
3. The Government should promote qualitative economy participation in the GVCs. The government should contribute to enhance different mechanisms of economic and scientific-technical cooperation, including specialized programs for capacity building to promote better integration of the economy in the GVCs on a higher level and not to limit within "raw level."
4. Promote the inclusion of small and medium-sized enterprises (SMEs) in GVCs. It is necessary to develop and implement initiatives to promote SMEs in such essential areas for their participation in the GVCs as infrastructure, interconnectedness supply chains, innovation, strengthening the professional development, adaptation to international standards. It is necessary to intensify efforts to build capacity of SMEs and improve the participation mechanisms understanding in the GVCs.
5. Take effective measures to trade facilitation. It should be at the national level to develop a clear program on trade facilitation in the context of the WTO Agreement. It is necessary to establish together with business inter-institutional body on trade facilitation and supply chains.
6. Encourage public-private partnerships (PPP) in order to GVCs development. Corporate and sectoral partnerships should be stimulated to attract investment in the GVCs as well as capacity building by improving the appropriate institutional and regulatory environment. Strive to build trust and understanding between the PPP participants for building up the interaction between the public and private sectors.
7. Strengthen cooperation within GVCs topics with other stakeholders. It is necessary to promote cooperation. Cooperation development with international organizations and associations such as the WTO, UNCTAD, OECD, «G-20», World Bank, IMF, European Bank for Reconstruction and Development, various agencies of the European Union should be fostered in order to enhance the effectiveness of GVCs policy.
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